Overhaul, Make It a Venti

Wednesday

Jan 30, 2008 at 5:03 AM

After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.

KANSAS CITY, Mo.—When a Starbucks moved in next door, the coffee fanatics who run the Broadway Cafe trembled. Sure, they roasted their own beans and served up handmade espresso drinks to a loyal clientele. But would it be enough to fight off a corporate behemoth?

That was nearly 10 years ago, and now the results are in: the Starbucks is about to shut down. The store had a funereal air the other day as a handful of loyal customers sipped beverages and jotted goodbye notes in what amounted to a book of condolences.

Next door, the Broadway Cafe was bustling. “You win because of the coffee,” said Jon Cates, one of the owners.

After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.

The man who built the chain, Howard D. Schultz, has retaken the reins in an effort to revive it. He is scheduled to roll out a plan on Wednesday that will almost certainly involve shutting down more stores in the United States while accelerating expansion overseas.

Mr. Schultz has said he wants to refocus on the “customer experience,” recapturing some of the magic of the chain’s early years, when employees — who had heard the term barista before Starbucks came along? — made the drinks by hand and customers were excited by top-notch coffee.

Mr. Schultz faces a difficult task: He has to slow down the company to make stores feel more like hip neighborhood coffeehouses while also delivering the steady growth that investors have come to expect from Starbucks.

Can he pull it off?

Details of Mr. Schultz’s plan remained under wraps on Tuesday. Officially, he has not given up the goal of opening 40,000 stores worldwide, which no food or beverage chain has ever achieved. Wall Street will be watching closely on Wednesday to see how he reconciles that plan with the need to close some stores and refocus the business in the United States.

After going head-to-head with Starbucks for almost 10 years, Mr. Cates, the Broadway Cafe owner, said he no longer worried much about competition from the company. Starbucks, he said, has lost its focus on coffee, noting that the company switched from making espresso by hand to robotic machines that pump out drinks with the push of a button.

“For them, the move to fully automated machines was inevitable, but they lost something,” Mr. Cates said. “If you are a barista, you have to roast your own coffee. It’s a necessity. You cannot compete by selling music or WiFi.”

Even some loyal Starbucks customers here concede that something has changed, and not for the better.

It was not too long ago that the arrival of a Starbucks was a major event, a recognition that a town or neighborhood was worthy of the chic Seattle-based chain. But in the last five years, every street corner, airport concourse and roadside rest stop in America seemed to attract a Starbucks.

As the company grew and customer traffic increased, Starbucks expanded its food offerings while introducing efficiencies like those automated espresso machines. Gradually, complaints surfaced that Starbucks felt more like a fast-food restaurant than a coffeehouse.

In five years, Starbucks nearly tripled the number of stores worldwide, from 5,886 in 2002 to 15,011 in 2007.

The company is by no means losing money: It earned $673 million in profit on $9.4 billion in net revenue for 2007.

But Starbucks has been hurt by rising costs and stiff competition. Last summer, its customer traffic declined for the first time since the company went public, sending the stock tumbling.

By the end of the year, Starbucks stock, once seemingly invincible, had declined by 42 percent.

This month, Starbucks ousted its chief executive, James L. Donald, and brought back Mr. Schultz to try to invigorate the company.

Mr. Schultz had already outlined many of the problems in a Feb. 14, 2007, memo that is now famous. Entitled “The Commoditization of the Starbucks Experience,” the memo acknowledged that rapid growth had diluted the Starbucks magic.

Some Wall Street analysts have pointed to specific problems that Starbucks needs to tackle, from a lack of new products to a failure to handle morning traffic adequately in crowded stores. Sales of breakfast sandwiches and drinks like frappuccinos have been disappointing.

Marc Greenberg, an analyst at Deutsche Bank, questioned Starbucks initiatives that encouraged competition with fast-food chains, like drive-through windows and an expanding menu of food.

“Starbucks is all about fresh ground coffee,” he said. “As for the food, there’s no kitchen in the store. How fresh can it be?”

Even so, he said the primary problem for Starbucks was simple.

“It’s being overbuilt, classic over-saturation,” Mr. Greenberg said. “How many places do we need? Aren’t we there? Is it hard to find a Starbucks?”

Geoff Vuleta, chief executive of Fahrenheit 212, an innovation consultancy in New York, said Starbucks had lost focus on the experience that drew customers in the first place by neutering the baristas and by crowding the stores with merchandise, or as he put it, “replacing mystique with relentless commerce.”

“We all remember our initial encounters with Starbucks: the exoticism of new language, space, sounds and smells,” Mr. Vuleta said in an e-mail message. “Fast-forward a decade, and the first thing that jumps out is that the mystique that so thoroughly defined the initial experience is conspicuously absent — trampled in the stampede of proliferation.”

He suggests that Starbucks get back to basics, emphasizing the role of its baristas and focusing on the quality of its coffee, promoting “the theater of the craft and bold celebration of the provenance of the bean.”

In effect, Mr. Vuleta is describing the Broadway Cafe here, where all the coffee is roasted by hand and the lattes are made by a crew of baristas in T-shirts and jeans. Not only is the place funkier than the Starbucks next door; it is also cheaper, with free refills.

“We are too nice,” said Sara Honan, the co-owner.

Maybe, but it has also proved to be good business. In the nearly 10 years since the Starbucks opened next door, three more opened within a mile or so. And yet, the Broadway Cafe remained popular.

“The more stores Starbucks opened, the slower” the chain’s business became, she said. “It has not worked out the way they said it would — more stores, more business.”

Finally late last year, came word that the Starbucks next door would close. Starbucks declined to say why it was closing the store.

“We are not doing anything revolutionary here,” Ms. Honan said. “Coffee, and food that goes well with coffee.”

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